Facts Everyone Should Know About Bankruptcy

Information verified correct on April 27th, 2017

bankrupt coupleIn a debt crisis? Learn about bankruptcy and debt agreements and the light at the end of the tunnel.

Bankruptcy is a serious decision and the last resort for people who are dealing with debt that has gotten out of control. If you are considering declaring bankruptcy or entering into a debt agreement, you need to consider all other alternatives first and speak to a financial counsellor to ensure it's the best decision for you.

In the guide below, we'll show you the basics of bankruptcy and debt agreements and what the consequences are to help you make a more informed decision.

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What is bankruptcy?

Bankruptcy is the legal state that absolves you from paying your debts. You can apply for bankruptcy in two ways; the first is through a debtor's petition which is where you apply for bankruptcy yourself; the second involves you being forced into bankruptcy through the courts, which is called a sequestration order. In both cases, a trustee is appointed to manage your finances. A trustee can sell certain types of assets you own, take any income you earn over a certain amount and investigate your financial affairs.

Once you declare bankruptcy you’re released from your debts. If you have a secured debt like a mortgage on a property, the asset can be sold to repay your debts. If you have an unsecured debt like a credit card or personal loan, your assets such as your house or car cannot be repossessed.

Declaration of Intention

A Declaration of Intention (DOI) gives you 21 days to decide whether you want to declare yourself bankrupt, or take out a debt agreement or PIA. Creditors with unsecured debts are prevented from taking action during the DOI period.

  • Your creditors are alerted when you lodge a declaration of intention and they’re provided with information about your finances
  • A DOI is not an act of bankruptcy, your name is not recorded on the National Personal Insolvency Index
  • At the end of the 21-day period, if you haven’t entered into a formal arrangement, creditors can take you to court and force you into bankruptcy.

Bankruptcy and your credit file

The laws about bankruptcy and reporting do change. Keep an eye on government sites like afsa.gov.au — the Australian Financial Security Authority (AFSA) is the regulatory body for insolvency.

The most current information states that bankruptcy stays on your credit file for at least two years from the date of discharge before it’s deleted.

Type of default:Stays on credit file for:
  • 5 years from the date you officially became bankrupt, or
  • 2 years from the date your bankruptcy was discharged – whichever is later.
Court judgements
  • 5 years from the date the court judgment was made.

How to declare bankruptcy

Before you declare bankruptcy it's important to speak to a financial counsellor for free personal advice about dealing your debt. You can consider trying to organise payment options with your creditors or organising a budget with the help of a financial counsellor. If your other options are exhausted you may decide to enter bankruptcy, or you may be made bankrupt by the courts.

The process depends on whether you have issued a debtor petition or you have received a sequestration order.

  • Voluntary bankruptcy: Debtor’s petition. You need to complete a debtor's petition, which is an application to become bankrupt and includes a signed acknowledgement of prescribed information and include a statement of your affairs. You'll need to complete and lodge the debtor's petition with the Official Receiver within 28 days of signing the forms. To be eligible you need to have an Australian connection, such as usually residing in Australia, the forms need to be filled out accurately and you need to provide ID. You can get the forms from the AFSA website.
  • Involuntary bankruptcy: sequestration order. If you owe more than $5,000 to a creditor you can be asked to attend court and be forced into bankruptcy. A creditor can issue a sequestration order if they’ve gotten a court judgement against you in the previous six years. You are generally given a 21-day period to pay your debts before the court hearing and have a chance to be heard by a judge before the actual court date. If you can’t pay your debts in this period, the court will issue a sequestration order declaring you bankrupt and a trustee will be appointed to manage your case.

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When does bankruptcy end?

The end of bankruptcy is when you are discharged, which is where you are no longer consider bankrupt. But in reality, the effects of bankruptcy last long after you’ve been discharged. Your name will be recorded on the National Personal Insolvency Index (NPII) forever. In terms of being discharged and your bankruptcy being removed from your credit file, the following applies:

  • Debtors petition bankrupts. If you became bankrupt by presenting your own petition, you'll be due for discharge three years and one day after filing your petition with the AFSA.
  • Sequestration order bankrupts. If you were made bankrupt by an order of the court, you are due for discharge three years and one day after your complete statement of affairs was accepted by the AFSA.
  • Exceptions for all bankrupts. In some cases, bankruptcy can be extended to five or eight years if your trustee lodges an objection to your discharge.

Debt agreement

A debt agreement is an agreement between yourself and your creditors that you will repay your debts. It essentially freezes interest on your accounts and gives you time to get your debts under control. While this may seem like a convenient option, it's important to note that a debt agreement is an act of bankruptcy and will be noted as such on your credit file.

Think about the following if you’re considering a debt agreement.

  • Not everyone can get a debt agreement. There are income limits and other eligibility requirements.
  • Secured creditors may still claim debts.
  • A debt agreement ends when you pay out the contract or if the agreement is terminated by the courts or creditors.

Your name is permanently recorded on the NPII and the debt agreement is listed on your credit file for a period of two years from when the agreement is discharged.

Debt agreement and credit file history

Type of default:Stays on credit file for:
A debt agreement
  • 5 years from the date the agreement was entered into, or
  • 2 years from the date the agreement was:
    • Terminated,
    • Or the agreement was declared void.

Personal Insolvency Agreement (PIA)

Any insolvent Australian resident can apply for a Personal Insolvency Agreement (PIA). This is not like a debt agreement, which has income and debt eligibility requirements.. But like a debt agreement, when you appoint a trustee to manage your financial affairs, you’re committing an act of bankruptcy and this can be used in formal proceeding to make you officially bankrupt. The listing is recorded on your credit file and your name is permanently recorded on the NPII.

Personal Insolvency Agreements and credit file history

Type of default: Stays on credit file for:
Personal Insolvency Agreement.
  • 5 years from the date the agreement was entered into, or
  • 2 years from the date the agreement was terminated.

Informal debt agreements

An informal debt agreement is an arrangement to pay back a lender outside the terms and conditions of your original contract. It doesn’t involve court and you’re not declaring yourself bankrupt. It’s important to seek financial advice if you want to enter into an informal debt agreement. Some companies specialise in helping you set up and run informal debt agreements. Fox Symes offer informal debt agreement services and can work with you to get your debts back under control.

Type of default: Stays on credit file for:
Consumer credit payment default, i.e failing to pay credit card or person loan by more than 60 days.
  • 5 years from the date the creditor listed the default to the credit reporting body (CRB).
If you’ve defaulted on a payment and you’ve made arrangements with the lender to pay back the debt in a manner different to the original terms and conditions.
  • 2 years from the date the creditor listed the default to the CBR.

Life after bankruptcy

The declaration of bankruptcy can have serious consequences for the rest of your life.

  • Diminished chances of obtaining credit even after the listing has been removed from your credit file.
  • Diminished employment opportunities. You are not able to hold certain positions or jobs both while you’re insolvent and after you’ve been discharged from bankruptcy.
  • Your name is permanently recorded on the National Personal Insolvency Index (NPII) and can be viewed by anyone for a fee.

Once you’ve been discharged from bankruptcy, you’re able to work in most professions and travel freely outside Australia.

"How can I get a personal loan, credit card or home loan after bankruptcy?"

There is such a thing as life after bankruptcy. You have limited options for credit while you are bankrupt, but after you are discharged your options open up significantly. If you're considering your bankrupt loan options you can learn about them here.

Have more questions about bankruptcy?

Can you pay out a debt agreement early?

It is possible to pay out a debt agreement early. Whether you pay the debt agreement early using a lump sum payment or you pay the agreement over time, the listing is still recorded on your credit file for a number of years. Remember that you don’t pay any interest on the outstanding balance, so ask yourself whether you can put the money to better use.

If you wish to pay out a debt agreement early, your bankruptcy administrator will let you know about the best course of action for you. You may need to provide a supplementary statement to support your request to have the terms of you debt agreement changed.

What's the National Personal Insolvency Index?

Although information is eventually cleared from your credit file after a number of years, if you're declared bankrupt, your name and personal details are recorded on the National Personal Insolvency Index (NPII) forever. This is a permanent public record that can be viewed by anyone for a fee. The NPII is maintained by the Australian Financial Security Authority (AFSA) and has information all the way back to 1928.

Will being listed on the NPII affect my chances of being approved for a loan?

There may be a question in the application for some unsecured forms of credit that asks whether you’ve declared bankruptcy before in the past, if you answer yes to this question, the lender may look up the NPII to see when the bankruptcy was discharged; however, this doesn’t necessarily mean you’re immediately excluded from obtaining credit. The lender makes a decision based on your current financial situation.

What’s the difference between voluntary and involuntary bankruptcy?

There’s little difference between lodging a debtor’s petition and receiving a court summons. There may be extra paperwork if you get a court order.

How much do I have to owe before I can declare bankruptcy?

There is no minimum amount you have to owe before you can declare bankruptcy. Claims are to and administered by the ASFA.

I’m bankrupt, can I keep my home?

If you’re bankrupt, your home can be sold to cover your debts. The home is not a protected asset under the Bankruptcy Act 1966.

  • If the property is owned and is not mortgaged, the property can be sold by the trustee at market value to cover the bankrupt’s debts.
  • If the property is jointly owned and with no mortgage, the trustee may give the co-owner of the property a chance to buy the bankrupt’s share of the property. There are a number of different options that depend on the ownership structure of the property, the level of gearing and the bankrupt’s willingness to sell. Consult a financial counsellor for the best information for your personal circumstances.

How do I know if I’m eligible for a debt agreement?

There are certain requirements you must meet if you wish to enter into a debt agreement.

  • You must be unable to pay your debts when they’re due.
  • Your assets and income, unsecured debts must all be less than the prescribed limits.
  • You must  not have been declared bankrupt in the previous 10 years.

If my business goes bankrupt will I still be able to keep the family home?

The consequences of business bankruptcy depend entirely on how your business is structured. If you’re a sole trader, the loans are under your name, your house may be liable to be repossessed. If your business is structured as a company, as the director, you should have limited liability and your home is safe from seizure.

What assets can I keep if I’m declared bankrupt?

If you’re declared bankrupt, a trustee has the power to administer the sale of your assets.

Asset:What can happen?
Home / House.Can be sold by the mortgage provider or the trustee to cover debts.
Income from investment property.Used to pay debts and becomes part of the bankrupt’s estate.
Car.If the vehicle is secured to a car loan it can be reclaimed by creditors. Vehicles over a certain value can be sold by the trustee.
Household items.Bankrupt can keep personal household items.
Cash and banking.Any cash or money held in accounts can be used by the trustee to pay the bankrupt’s debts.
Wage / salary / income.After-tax income over a certain amount will be docked and given to the trustee. Low income earners are exempt from compulsory contributions.
Tax refunds.Tax refunds are kept by the Tax Office or given to the trustee. The rules are different depending on when the funds were tax — before or after your bankruptcy was declared.
Business tools.Tools up to the value of $3,600 can be kept.
Superannuation payments.Go to the trustee if received before the date of bankruptcy. Payments received after the date of bankruptcy can be kept.
Life insurance.Speak to your financial counsellor.
Business leases.Administered by the trustee and can be sold.
Shares and other assets.Are used by the trustee to administer the bankrupt’s estate.
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6 Responses to Facts Everyone Should Know About Bankruptcy

  1. Default Gravatar
    Greg | June 28, 2016

    Can you work for someone selling general insurance if you are a bankrupt currently

    • Staff
      Elizabeth | June 28, 2016

      Hi Greg,

      The Bankruptcy Act doesn’t restrict you from working in a certain profession, but certain industry associations or licensing authorities can impose restrictions or conditions on you. According to the Australia Financial Security Authority’s website there are no restrictions listed for those selling general insurance but you may want to confirm this with the relevant industry association.

      I hope this helps,


  2. Default Gravatar
    wezley | June 10, 2016

    Can a trustee freeze your account without letting you know first.

    • Staff
      Elizabeth | June 14, 2016

      Hi Wezley,

      If your account was just used to predominantly receive your personal income, and it doesn’t exceed the balance limit (usually around $2,000) then you should get in contact with your trustee to discuss why it was frozen. If you aren’t happy with the outcome of the discussion you can contact the Australian Financial Security Authority directly to rectify the situation.

      Hope this helps,


  3. Default Gravatar
    Irine | December 5, 2015

    I went voluntarily into bankruptcy, but the bank changed my trustee. This Trustee locked my account which I use for Age pension. As a result I am not able to access to my pension – the only life-supporting income I have. What can I do? Can I claim that his Trustee acts unlawful and ask to change him?

    • Staff
      Elizabeth | December 7, 2015

      Hi Irine,

      According to the Australian Financial Security Authority (AFSA), the first step is to talk to your trustee and explain the situation in order to have it rectified. You are entitled to a certain amount of income under the bankruptcy act and the trustee cannot freeze your account without reason. If you do not get anywhere by speaking directly to your trustee, you can complain directly to the AFSA by calling them on 1300 364 785.

      I hope the situation is rectified for you.



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